TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe unveiled a plan on Friday to cut the corporate tax rate below 30 percent in stages to help pull the economy out of two decades of sluggish growth and deflation.
Investors have been scrutinising whether Japan can substantially lower the corporate tax rate - among the highest in the world - to spur growth in the world’s third-largest economy. Abe also needs to strike a delicate balance between stimulating growth and reining in snowballing public debt, twice the size of its $5 trillion economy.
The corporate tax cut is a major issue to be included in the government’s key fiscal and economic policy outline, which will be finalised around June 27 along with a detailed “growth strategy” of structural reforms.
“Japan’s corporate tax rate will change into one that promotes growth,” Abe told reporters, adding that he hoped the lower burden on companies would lead to job creation and an improvement also for private citizens.
He also said the government would make sure that alternative revenue sources were secured to offset a decline in corporate tax revenue. He did not elaborate.
The government said in its draft economic and fiscal policy outline it would decide on a concrete plan by year’s end to secure a “permanent revenue source” needed for corporate tax cuts, such as by broadening the tax base.
An alternative revenue source must be secured permanently so that Japan can achieve its aim of bringing its primary budget balance - excluding new bond sales and debt servicing - into the black in the fiscal year to March 2021, it said in the draft.
The government reiterated it would decide by year-end whether to go ahead with its plan to raise the sales tax to 10 percent in October 2015. The national sales tax rose to 8 percent from 5 percent on April 1 in a bid to fix the public debt.
Japan’s corporate tax rate is nearly 36 percent for large companies operating in Tokyo, among the highest in the industrialised world.
Private-sector members of the government’s top economic and fiscal council have proposed cutting the rate to 25 percent eventually to put it in line with international standards.
Japan’s corporate tax rate ranks second after the United States among the 34-member OECD economies, with countries such as Britain, Italy, Canada below 30 percent.
In Asia, China and South Korea impose a corporate tax around 25 percent and Singapore puts it at 17 percent.
The government is hoping to see lower corporate tax rates lure foreign direct investment (FDI) and spur capital spending at home, rather than boosting cash reserves at firms.
“But it would take time for such an effect to emerge in the economy,” said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.
“Corporate tax cuts alone would not be a panacea. Japan needs to break other barriers such as language and higher business costs, including electricity, to spur FDI.”
The finance ministry and ruling party tax panel say that any revenue lost in a tax rate cut should be offset by bringing in alternative fixed revenues, rather than counting on any increase in tax revenue brought by higher economic growth. Each percentage point of tax cuts would reduce government revenue by about 470 billion yen ($4.61 billion) a year, according to the finance ministry. At the same time, only 30 percent of all Japanese firms pay corporate income tax, so fiscal hawks want many more brought onto the tax rolls to offset a cut in the tax rate.
Most loss-making firms in Japan are exempted from paying corporate tax and companies can defer losses over several years, making it easier for them to avoid paying taxes.
Additional reporting by Yuko Yoshikawa; Editing by Chang-Ran Kim and Nick Macfie